D. Defining Rules of Origin under GATT / WTO
I. Non-preferential Rules of Origin
- Dispute concerning the New American Rules of Origin for Textile Products among the European Communities and the United States (WT/DS85; WT/DS151)
1. The Core of the EC-US conflict
2. Measures Affecting Textiles and Apparel Products (I); WT/DS85
3. Measures Affecting Textiles and Apparel Products (II); WT/DS151
4. Result
II. Preferential Rules of Origin

E. Rules of Origin as a Trade Barrier

F. Rules of Origin as a Factor of Production

G. Conclusion

References

Rules Of Origin

A. Introduction “The Core Issue of Rules of Origin”

Rules of Origin are methods to extract the origin of a product (and sometimes of services[1] ), and help to determine the nationality of an imported good or product. The importance of rules of origin has to be seen in the light of economic values or any kind of trade restriction. Once the origin of a product is known, preferences or restrictions to the product can be much simpler applied by the importing country. Such preferences and restrictions on the imported good are for instance duty-free entry into a Free Trade Area (FTA), quantitative restrictions on goods originating in a country subject to a quota, or anti-dumping duties on goods from the targeted company that originate in the targeted country[2]. Furthermore, rules of origin are also used to compile trade statistics, and for “Made in …” labels that are attached to products[3].

As long as all parts of a product were manufactured and assembled primarily in one country rules of origin remained an uncontroversial and neutral device. But trade and economy are not under fixed or immovable conditions; thence the rise of multinational corporations and the production of goods in multiple stages, using parts that are produced around the world, enabled rules of origin to be used as effective means of protection and trade barriers. Bearing in mind that goods are produced from different parts around the world and under different free trade agreements, rules of origin do not have one correct definition and vary much in application and function[4].

One of the main objectives of rules of origin should be uniformity and simplicity in their administration. Although this is not always true, developing and developed countries have undertaken the task towards simplification, harmonization and liberalization of rules of origin. This harmonization work has been carried out under the auspices of the Committee on Rules of Origin (CRO) of the World Trade Organization (WTO) and the Technical Committee on Rules of Origin (TCRO) of the Brussels-based World Customs Cooperation Council, which has been responsible for the technical part of the work, including discussions on the rules of origin options for each product[5].

After all, an Agreement on Rules of Origin (ARO) was established in the WTO. This ‘first-ever’ agreement is designed to harmonize and to clarify non-preferential rules of origin for goods in trade on the basis of the substantial transformation test. The WTO wants to ensure that their rules are transparent and do not distort or disrupt on international trade, that they are administered in a consistent, uniform, impartial and reasonable manner, and that they are based on a positive standard[6]. That means the ARO in WTO wants to state what does confer origin rather than what does not[7].

B. Historical Background and Development

Until 1994, GATT had no specific rules governing the determination of the country of origin of goods in international commerce. Contracting parties were free to determine its own origin rules, and could even maintain several different rules of origin depending on the purpose of the particular regulation[8].

Article VIII:1(c) of the GATT Agreement, dealing with fees and formalities connected with importation and exportation, states that "the contracting parties also recognize the need for minimizing the incidence and complexity of import and export formalities and for decreasing and simplifying import and export documentation requirements"; and the Interpretative Note 2 to Article VIII states that “it would be consistent with paragraph 1 if, on the importation of products from the territory of a contracting party into the territory of another contracting party, the production of certificates of origin should only be required to the extent that is strictly indispensable".

It is accepted by all member countries that harmonization of rules of origin i.e., the definition of rules of origin that will be applied by all countries and that will be the same whatever the purpose for which they are applied, would facilitate the international trade flow. In fact, misuse of rules of origin may transform them into a trade policy instrument per se instead of just acting as a device to support a trade policy instrument. Given the variety of rules of origin, however, such harmonization is a complex exercise[9].

In 1981, the GATT Secretariat prepared a note on rules of origin[10] and, in November 1982, Ministers agreed to study the rules of origin used by GATT Contracting Parties[11]. Not much more work was done on rules of origin until the Uruguay Round negotiations. In the late 1980s developments in three important areas served to focus more attention on the problems posed by rules of origin:

First, an increased use of preferential trading arrangements, including regional arrangements, with their various rules of origin; second, an increased number of origin disputes growing out of quota arrangements such as the Multifibre Arrangement and the ‘voluntary’ steel export restraints; and third, an increased use of anti-dumping laws, and subsequent claims of circumvention of anti-dumping duties through the use of third country facilities. The increased number and importance of rules of origin led the Uruguay Round negotiators to tackle the issue during the negotiations[12].

However, this work was planned to end by 1996. Due to wide divergences between the European Communities (EC) and the United States (US), and, afterwards with developing countries, the WTO was forced to twice postpone the conclusion of the negotiations. Nevertheless, many unsolved items remained to be negotiated before the WTO Ministerial Conference in Doha in November 2001[13].

C. Methods of Determining Origin

First, the wholly obtained or produced-category applies only to a preferential trading arrangements member, and asks whether the commodities and related products have been entirely grown, harvested, or extracted from the soil in the territory of that member, or manufactured there from any of these products. The rule of origin is met through not using any second-country components or materials. Most countries apply this strict and precise definition[15].

Second, further work or material added to a merchandise in another country must affect “substantial transformation” of the merchandise in order to change the merchandise’s country of origin, that means if the merchandise is produced in two or more countries, then its country of origin is the country in which the last ‘substantial transformation’ of the merchandise occurred[16].

I. Substantial Transformation

However, a precise and universally applicable definition of the concept of ‘substantial transformation’ does not exist. Some guidance can be found in Annex D.1 of the Kyoto Convention[17]. According to Annex D.1, Definition (c) of the Kyoto Convention “the term ’substantial transformation criterion’ means the criterion according to which origin is determined by regarding as the country of origin the country which the last substantial manufacturing or processing, deemed sufficient to give commodity its essential character, has been carried out”. In general the substantial transformation criterion says that a good originated in the last country where it emerged from a given process with a “distinctive name, character or use”[18]. But the substantial transformation of a good requires more than just a change in the article; it requires a transformation into a “new and different article, having a distinctive name, character and use”[19].

The substantial transformation test captures a very simple meaning of origin. This will work for a product originating from one single country. But if a product is not necessarily produced in one single country, the good is a product of the country where it last underwent substantial transformation in order to prevent of having multiple countries of origin[20].

[...]

[1] Dehousse / Ghemar / Vincent: J.W.T. 36(1): p. 67.

[2] Policy Brief: Rules of Origin: Conceptual Issues, p. 1.

[3] Trading into the Future: “Rules of Origin; made in … where?”, p. 35.

Rules of Origin are methods to extract the origin of a product (and sometimes of services), and help to determine the nationality of an imported good or product. The importance of rules of origin has to be seen in the light of economic values or any kind of trade restriction. Once the origin of a product is known, preferences or restrictions to the product can be much simpler applied by the importing country.

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2003, Rules of origin in the WTO and in other free trade agreements - An overwiew, Munich, GRIN Verlag, http://www.grin.com/en/e-book/41007/rules-of-origin-in-the-wto-and-in-other-free-trade-agreements-an-overwiew

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